Downside Expected for Anadarko After Justice Files Gulf Oil Spill Suit

Includes: APC, BP
by: Trefis

Anadarko (NYSE:APC) is one of the largest independent oil and gas producers in the US with 2.3 billion barrels of oil equivalent of proven reserves. The company competes with other established oil producers like Exxon (NYSE:XOM), ConocoPhillips (NYSE:COP) and Chevron (NYSE:CVX).

We maintain a price estimate of $72.82 for Anadarko, roughly 8% above market price, with 46% of the company’s estimated value generated by crude oil and condensates production.

US Department of Justice Files Suit Over Gulf Oil Spill

Recently, the US Department of Justice named Anadarko as one of the defendants in the lawsuit filed in relation to the Gulf oil spill. Anadarko has a 25% stake in the failed Macondo well that led to the Gulf oil spill during April 2010. The suit also names BP (NYSE:BP), which was the primary operator of the Macondo well, in addition to Mitsui & Co. (10% stake), Triton Asset Leasing, and Transocean, as well as BP’s insurer, QBE Underwriting Ltd. [1]

The suit alleges that the companies violated safety procedures and failed to use the best available and safest drilling technology to monitor the well’s conditions leading up to the crisis.

Anadarko has denied any liability in the gulf oil spill cost, contending that the blowout was due to BP’s mishandling of the well in response to “several critical warning signs.” BP, however, contends that Anadarko and Mitsui & Co., as partners in the well, should bear their share of the costs of handling the crisis. BP has billed Anadarko for $272.2 million out of the total $3.12 billion spent on cleanup costs, claims, and reimbursements to US and local governments. [2]

The court could consider civil penalties under the Clean Water Act, which permits fines for water pollution. Potential fines could fall within a range of $1,100 to $4,300 per barrel, with the upper limit associated with a court ruling of gross negligence on behalf of the defendants.

The total oil spill amounts to an estimated 4.1 million barrels over a three-month period, meaning that the potential fine could reach a maximum of just under $18 billion. The well partners, including BP and Anadarko, could face other fines as well stemming from multiple lawsuits related to damage to property and the environment. [1]

If the court hits Anadarko with its share of this potential fine, the charge could amount to roughly $4.5 billion. This result could potentially knock more than 10% off of our $72.82 price estimate for Anadarko.

Drag the trend-line in the chart above to see the impact of various crude oil & condensates sales volume scenarios on Anadarko’s stock value.

Anadarko’s Crude Oil Production Growth Could Suffer

If Anadarko has to share in the cost of the Gulf oil spill, it would significantly affect the company’s crude oil production capacity in the coming years. Oil companies like Anadarko invest heavily in exploration of new oil wells to supplement their reserves and ensure future production of oil, and a massive outlay of funds could hinder such investments.

We currently estimate that Anadarko’s crude oil & condensates production and sales will increase to about 86 million barrels per year by 2017 from its current level of about 70 million barrels, but a decline in funds for exploration activities due to the burden of oil spill costs could provide downside to our projections. If this scenario causes sales volume to increase by only half of our projected 16 million rise through 2017, it could independently generate 5% downside to our price estimate.


  1. McClatchy: Justice Department Sues BP
  2. The Guardian: BP Sends Well Partner Anadarko a Bill for $272.2 Million to Help Pay for Spill Cleanup

Disclosure: No position